Category: Federal Budget

President Trump falsely claimed Wednesday that, “in one sense,” the stock market rally since his election reduces the $20 trillion national debt.

Let’s break down his astonishing claim.

“The country — we took it over, it owed $20 trillion,” Trump Sean Hannity of Fox News in Pennsylvania.

So far, so good. It’s correct that the U.S. owed nearly $20 trillion when Trump took office.

“As you know, the last eight years, they borrowed more than it did in the whole history of our country. So, they borrowed more than $10 trillion dollars, right?”

Also, more or less accurate — $9 trillion to be exact.

“And yet, we picked up $5.2 trillion just in the stock market. Possibly picked up the whole thing in terms of the first nine months in terms of value. So, you can say in one sense we’re really increasing values; and maybe in a sense we’re reducing debt.”

Huh? To say this is a head-scratcher is an understatement.

Trump is right that the stock market has added trillions in value since his election.

But higher stock prices reflect corporate profits. Shareholders and investors reap the rewards. When investors get richer, it does not reduce the amount of money Congress and the federal government has already spent and owes.

The national debt, which he correctly states is $20 trillion, is the result of the government spending more than it takes in. To cut the debt, Congress has to spend less or raise taxes. That would free up cash to pay down what the U.S. owes.

“The stock market’s gains have virtually nothing to do with the size of the national debt, which continues to rise because government spending far exceeds government receipts,” political economist Greg Valliere told CNNMoney.

“A higher stock market encourages consumers and companies to spend more, which helps the overall economy,” said Valliere of Horizon Investments. “But it’s absurd to contend that the national debt has fallen because of this.”

In fact, the president wants to cut taxes and potentially add to the debt if spending cuts cannot be found to offset those tax cuts.

The White House, in a statement, said Trump “was simply making the point that we’ve seen enormous growth in the stock market since his election, that means more money in the pocket of everyday citizens, and more circulating in our economy as a whole.”

As for that stock market rally, the Standard and Poor’s 500 is up nearly 20% since his election — an impressive rally. No question investors cheer this president’s pro-business, anti-regulation, lower taxes agenda. But under the Obama Administration that same index rose 235%. And no, that stock market rally did not reduce or offset the national debt either.

President Donald Trump uncorked a tweet storm on Thursday morning, lashing out at Democrats over a slew of different issues.

Trump’s Twitter tirade — six messages over the course of just two minutes — came a day before an expected congressional vote on appropriations that would seek to avoid a shutdown of the federal government.

The president’s tweets seemed to refer to threats by Democrats in Congress not to support that appropriations package if it does not include spending for Obamacare subsidies that lower the cost of out-of-pocket health expenses for low-income Americans.

If the government does not appropriate that money, which goes directly to insurers, those insurers that sell Obamacare plans will still be on the hook for the subsidies to customers, but will have to eat the cost of doing so.

But the tweeter in chief also teed off on Democrats on military spending, border security and national parks.

I want to help our miners while the Democrats are blocking their healthcare.

The president’s message comes just days before the Democrats and Republicans must agree on a federal budget or face a government shutdown.

Both parties are pushing for funding of their own priorities. The White House is pushing for funds to build a wall along the Mexican border and enhance border security, while Democrats hope to make more inroads in healthcare coverage.

White House officials have been publicly talking about the negotiations Sunday morning.

Office of Management and Budget Director Mick Mulvaney said Sunday that a government shutdown is not a “desired end.” He dodged questions about what would be acceptable to the administration in negotiations.

Secretary of Homeland Security John Kelly said the president will be “insistent” on border wall funding.

Congress must pass a spending bill by Friday to avoid a government shutdown.

Reality

This is an apparent threat to the possibility of ending federal subsidies to help lower-income people buy health insurance. This will remove 24 million people from health care.

Recently, his administration has become increasingly involved in conflicts he previously said the U.S. should avoid, and the president is placing more power in the hands of military leaders.

Earlier this month, the U.S. launched a missile strike on a Syrian airfield in response to a chemical attack in northern Syria that killed dozens of civilians. The chemical attack was allegedly carried out by operatives of Syrian President Bashar Assad.

The U.S. military last week dropped a massive non-nuclear bomb on ISIS targets in Afghanistan, using the weapon for the first time ever.

The country has also stationed a naval strike force near North Korea.

The Trump administration earlier this year also proposed a budget that would increase defense spending by $54 billion, which the White House said would be offset by other cuts.

President Donald Trump’s proposed budget contained a lot of cuts to key programs that help Trump’s own voters, such as the Appalachian Regional Commission that has been responsible for helping slash high poverty rates in rural America.

In an interview with CNBC’s John Harwood, White House budget director Mick Mulvaney said that he was able to convince Trump to slash the Appalachian Regional Commission and similar programs in his proposed budget because he had no idea what the program did.

“My guess is he probably didn’t know what the Appalachian Regional Commission did,” Mulvaney said of Trump. “I was able to convince him, ‘Mr. President, this is not an efficient use of the taxpayer dollars. This is not the best way to help the people in West Virginia.’ He goes, ‘Okay, that’s great. Is there a way to get those folks the money in a more efficient way?’ And the answer is yes. And that’s what’s we’re going focus on doing.”

Harwood then asked Mulvaney if Trump was aware that his budget cuts might hurt his own voters — and Mulvaney responded that the best way to help all voters was to spur higher economic growth.

“I think what the president will tell you is, ‘The best thing I can do for those folks, whether or not they voted for me, is to figure out a way to get 3.5 percent economic growth,’” he said.

Elsewhere in the interview, Mulvaney said he’s working on getting Trump on board with making some changes to Social Security, including the disability benefits program, which he said has “become effectively a long-term unemployment, permanent unemployment program.”

But he has no problem wasting more than $3 million a pop to spend weekends at his private Mar-a-Lago club in Florida. Trump has already made four trips there since becoming president on January 20, and on Friday he confirmed he’s headed there this weekend for the fifth time.

In fact, Trump has spent time at Trump-branded property every weekend of his presidency other than the very first, when he created chaos throughout the country by signing a Muslim ban executive order that was later stayed by a federal court.

As Quartz reported on Friday, after this weekend, Trump will have already spent about $16.5 million on trips to Mar-a-Lago. For that amount, Meals on Wheels could feed 5,967 seniors for a year and after school programs could feed 114,583 children for a year.

On Thursday, Office of Management and Budget director Mick Mulvaney defended the draconian cuts included in the Trump administration’s proposed budget by arguing that the federal government can’t ask “a coal miner in West Virginia or a single mom in Detroit to pay for” programs like the Corporation for Public Broadcasting. But one wonders whether those struggling Americans would rather have public radio or dole out their share of the $3.3 million a self-proclaimed billionaire is spending each weekend to mingle with his ludicrously wealthy club members down in Florida.

More than 120 retired generals and admirals urged Congress Monday not to slash funding for State’s diplomacy and foreign aid.

“The State Department, USAID, Millennium Challenge Corporation, Peace Corps and other development agencies are critical to preventing conflict and reducing the need to put our men and women in uniform in harm’s way,” they wrote.

“We urge you to ensure that resources for the international affairs budget keep pace with the growing global threats and opportunities we face. Now is not the time for retreat.”

Monday’s letter included such notable signatories as former CIA director and retired Gen. David Petraeus and former National Security Agency head and retired Gen. Keith Alexander.

Trump has reportedly instructed his Cabinet and administration officials to prepare budget requests for a first outline, expected March 13.

In response to this crisis, Obama did what presidents typically do during recessions: took on debt to stimulate the economy.

President Obama’s first 100 days in the White House:

In the depths of a recession, private investment collapses. So, generally accepted economic theory concludes that the government should induce investment and step in during these times of crisis to prop up the stumbling private sector.

Thus, both Obama and his predecessor George W. Bush signed into law bills to inject large amounts of capital into the economy to both save the financial sector and get people back to work.

For instance, Bush passed the Toxic Asset Relief Program in October 2008 which used just over $426 billion in federal funds to “bail out” the country’s largest banks. Obama signed the American Recovery and Reinvestment Act in February 2009 which allocated $831 billion in federal funds to finance investment projects such as infrastructure.

By contrast, Trump has inherited — as he even noted — a country with a vastly improved economic standing.

The labor market has improved drastically, with unemployment at just 4.8% and the number of people claiming unemployment benefits nearing the lowest point in 40 years. In fact, during Obama’s term the US added over 11 million private sector jobs.

While it’s not all perfect — business investment is lagging, wages still haven’t hit pre-crisis levels, and economic gains have not been equally distributed throughout the country — there is no doubt that Trump inherits a better economic starting position than Obama did in 2009 with no reason to spend massive amounts of federal money to assist the economy.

Trump even noted these differences in a follow-up tweet.

“Great optimism for future of US business, AND JOBS, with the DOW having an 11th straight record close,” tweeted Trump. “Big tax & regulation cuts coming!”

While some of the increase in the confidence indexes have come after the election, much of the economic good news was around before Trump took office.

Donald Trump declared Monday the U.S. never has to default on debt “because you print the money,” while trying to clarify his strategy for managing the national debt.

Trump insisted that he never said the U.S. should default or attempt to renegotiate with creditors, as had been reported. Trump told CNN’s Chris Cuomo on “New Day”:

People said I want to go and buy debt and default on debt, and I mean, these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?

The presumptive Republican presidential nominee explained he would center his approach on debt buybacks if and when interest rates go up.

I said if we can buy back government debt at a discount, in other words, if interest rates go up and we can buy bonds back at a discount — if we are liquid enough as a country, we should do that. In other words, we can buy back debt at a discount.

He also repeated his claim that he is “the king of debt.”

I understand debt better than probably anybody. I know how to deal with debt very well. I love debt — but you know, debt is tricky and it’s dangerous, and you have to be careful and you have to know what you’re doing.

Reality

Trump lied. In an interview with CNBC on 5/6/16 that we cataloged here along with video, Trump was asked if the U.S. needs to pay its debt in full or if it could negotiate a partial repayment, Trump said:

I would borrow, knowing that if the economy crashed, you could make a deal.

Also during his CNBC interview, Trump had said that interest rates should be kept low — contradicting his remarks on CNN Monday — because a rate jump could trigger a catastrophic increase the cost of borrowing.

We’re paying a very low interest rate. What happens if that interest rate goes up 2, 3, 4 points? We don’t have a country.

Furthermore, whether through debt buyback or restructuring, neither of Trump’s debt-reduction proposals from the past week square with his party’s core approach on the issue — deep spending cuts and entitlement program reform.

The Republican Party’s official platform argues the U.S.’s looming “debt explosion” should be averted through “immediate reductions in federal spending, as a down payment on the much larger task of long-range fiscal control.”

These cuts “must be accompanied by major structural reforms,” according to the platform, and pointing to programs such as Medicare, Medicaid, and Social Security, the GOP argues that “we must restructure the twentieth century entitlement state.”

In an interview on CNBC, Donald Trump broke with tired clichés about the evils of federal debt accumulation. “I am the king of debt,” he said. “I love debt. I love playing with it.”

But he replaced fearmongering about debt with an even more alarming notion — a bankruptcy of the United States federal government that would incinerate the world economy.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump said. “And if the economy was good, it was good. So therefore, you can’t lose.”

With his statement, Trump not only revealed a dangerous ignorance about the operation of the national monetary system and the global economic order, but also offered a brilliant case study in the profound risks of attempting to apply the logic of a private business enterprise to the task of running the United States of America.

Trump’s business logic makes sense

Trump is a businessman, and in terms of thinking like a businessman his idea makes sense.

The interest rate that investors currently charge the United States in order to borrow money is very low. A smart business strategy under those circumstances would be to borrow a bunch of money and undertake a bunch of big investment projects that are somewhat risky but judged to possibly have a huge payoff.

You now have two possible scenarios.

In one scenario, the investments work out and you make a ton of money. In that case, you can easily pay back the loan and everyone wins.

In another scenario, the investments don’t work out and you don’t make much money. In that case, you objectively can’t pay back the loan. You either work out a deal with the people you owe money to in which they accept less than 100 percent of what you owe them (this is called a “haircut”) or else you go to bankruptcy court and a judge will force them to accept less than 100 percent.

This is how businesspeople think — especially those who work in capital-intensive industries like real estate. And for good reason. This is the right way to run a real estate company.

Applying this idea to the United States would destroy the economy

The United States of America, however, is not a real estate development company. If a real estate company defaults on its debts and its creditors lose money, that’s their problem. If a bank fails as a result, then it’s the FDIC’s responsibility to clean it up.
The government doesn’t work like that. Right now, people and companies all around the world treat US government bonds as the least risky financial asset in the universe. If the government defaults and banks fail as a result, the government needs to clean up the mess. And if risk-free federal bonds turn out to be risky, then every other financial assetbecomes riskier. The interest rate charged on state and local government debt, on corporate debt, and on home loans will spike. Savings will evaporate, and liquidity will vanish as everyone tries to hold on to their cash until they can figure out what’s going on.

Every assessment of risk in the financial system is based on the idea that the least risky thing is lending money to the federal government. If that turns out to be much riskier than previously thought, then everything else becomes much riskier too. Business investment will collapse, state and local finances will be crushed, and shockwaves will emanate to a whole range of foreign countries that borrow dollars.

Remember 2008, when the markets went from thinking housing debt was low-risk to thinking it was high-risk, and a global financial crisis was the result? This would be like that, but much worse — US government debt is the very foundation of low-risk investments.

What’s especially troubling about Trump’s proposal is that there is genuinely no conceivable circumstance under which this kind of default would be necessary. The debt of the federal government consists entirely of obligations to pay US dollars to various individuals and institutions. US dollars are, conveniently, something the US government can create instantly and in infinite quantities at any time.

Of course, it might be undesirable to finance debts by printing money rather than raising taxes or cutting spending. In particular, that kind of money printing could lead to inflation, and even though inflation is very low right now there’s no guarantee that it will always be low.

But a little bit of inflation is always going to be strictly preferable to destroying the whole American economy, especially because a debt default would cause a crash in the value of the dollar and spark inflation anyway.

Trump doesn’t know what he’s talking about

This is the second time this week that Trump has revealed a profound ignorance of an issue related to government debts.

The early instance in which he kept proposing that Puerto Rico declare bankruptcy even though doing so is illegal was on a question that’s very important to Puerto Ricans but not so important to everyone else. It is, however, important to pay attention to how presidential candidates approach issues across the board — and what we saw with Puerto Rico is that Trump approached the issue by simplistically applying business logic without bothering to check whether it applies to the actual situation.

Now in the CNBC interview he’s done the exact same thing on a matter of more consequence —not the debts of Puerto Rico but the debts of the United States of America. It’s understandable that a real estate developer might assume that what works in real estate would work in economic policy, but it’s not true. And Trump hasn’t bothered to check or ask anyone about it.

Reality

What Donald Trump is proposing to pay off the national debt (which is money that we are obligated to pay creditors and for services) is to borrow large sums of money at a lower rate. In other words robbing Peter to pay Paul. Should the economy be healthy then we can pay back that borrowed money no problem. However should the economy crash, and the United States is unable to meet the legal obligation of debt repayment (‘defaulting‘) then Trump proposed to renegotiate that new debt at a lower rate.

While Trump did not say the word ‘default’ he explained the exact definition of the word default in his proposal.

This raised eyebrows by suggesting an unorthodox approach towards cutting the national debt… not paying it then renegotiate terms. Such a renegotiation risks creating financial turmoil because U.S. Treasuries are considered the safest assets on the planet and a major benchmark for valuing other securities. Calling into question their safety could cause borrowing rates to rise and create confusion in the markets.

Confusion in the markets is a very bad thing. Wall Street and businesses need to know what the rules are in order to subvert play them.